Current through Reg. 50, No. 13; March 28, 2025
(a) Purpose. The
purpose of this section is to enable insurers and HMOs to demonstrate ownership
of securities held by a custodian in a manner consistent with the common
practices of securities exchanges and markets while protecting the public
interest. An insurer or HMO may demonstrate its ownership of other securities
in accordance with Insurance Code Article 21.39-B.
(b) Definitions. The following words and
terms, when used in this section, shall have the following meanings, unless the
context clearly indicates otherwise.
(1)
Clearing corporation--A corporation or system that provides for the book entry
settlement and custody of securities and is further defined in Insurance Code,
Article 21.39-B, §5(b) and Texas Business and Commerce Code, §
8.102(a)(5).
(2) Custodian--A qualified bank, qualified
broker/dealer or a clearing corporation that accepts deposits of securities
from an insurer or HMO and safeguards, holds and reports on such securities
pursuant to a written custodial or trust agreement with an insurer or
HMO.
(3) Custodied Securities--An
insurer's or HMO's securities deposited with a custodian or redeposited with a
subcustodian.
(4) Insurer--A
domestic insurance company.
(5)
Qualified bank--A bank, federal home loan bank or trust company with trust
powers, organized under the laws of the United States or any state thereof,
which either is a member of the Federal Reserve System, a member of, or is
eligible to receive deposits which are insured by the Federal Deposit Insurance
Corporation, or maintains an account with a Federal Reserve Bank and is subject
to supervision and examination by the Board of Governors of the Federal Reserve
System, or is subject to supervision and examination by the Federal Housing
Finance Board, and is no less than "adequately capitalized" as defined by
standards promulgated by the appropriate federal bank regulatory
agency.
(6) Qualified
Broker/Dealer--A securities firm which has, as shown by its most recent audited
financial statement, a tangible net worth of at least $250 million, is
registered with and subject to the jurisdiction of the Securities and Exchange
Commission, and is a member of the Securities Investor Protection
Corporation.
(7)
Securities--Shares, participations, or other interests in property or an
enterprise as defined in the Texas Business and Commerce Code, §
8.102(a).
The term includes certificated and uncertificated securities.
(8) Subcustodian--A qualified bank, qualified
broker dealer or a clearing corporation that accepts deposits of securities
from a custodian for safeguarding and holding.
(9) HMO--A health maintenance organization as
defined in the Insurance Code Article 20A.02(n).
(c) Evidence of Securities Ownership.
(1) An insurer or HMO may demonstrate
ownership of its securities by having them held by a custodian pursuant to
subsection (d) of this section.
(2)
An insurer or HMO shall maintain evidence that the custodian meets the
requirements to be a qualified bank or a qualified broker/dealer as defined in
subsection (b) of this section.
(d) Required Provisions For Custodial
Agreements. Any arrangement involving an insurer's or HMO's deposit of its
securities with a custodian must be evidenced by an agreement signed by the
insurer or HMO and the custodian. The agreement signed by the insurer or HMO
and the custodian must provide for the conditions described in paragraphs (1) -
(13) of this subsection:
(1) The custodian
shall exercise the same due care that is in accordance with reasonable
commercial standards expected of a custodian with the responsibility for the
safeguarding of the insurer's or HMO's custodied securities and for compliance
with all provisions of the custodial agreement, whether the insurer's or HMO's
custodied securities are in the custodian's possession or have been redeposited
by the custodian with a subcustodian.
(2) The custodian shall indemnify the insurer
or HMO for any loss of custodied securities occasioned by the negligence or
dishonesty of custodian's officers and employees, or burglary, robbery,
hold-up, theft or mysterious disappearance, including loss by damage or
destruction. In the event of such loss, the custodian must promptly replace the
custodied securities or the value thereof, and the value of any loss of rights
or privileges resulting from said loss of custodied securities.
(3) Custodied securities shall be segregated
at all times from the proprietary assets of the custodian and
subcustodian.
(4) The custodian's
official records shall separately identify custodied securities owned by the
insurer or the HMO, whether held by the custodian or subcustodian. If held by a
subcustodian, the custodian's records shall also identify the
subcustodian.
(5) Custodied
securities that are in registered form shall be registered only in the name of
the insurer or HMO, the custodian or its nominee, or the subcustodian or its
nominee.
(6) All activities
involving the insurer's or HMO's custodied securities shall be subject to the
insurer's or HMO's instructions and the custodied securities shall be
withdrawable upon demand of the insurer or HMO.
(7) The custodian shall furnish, upon request
by the insurer or HMO, a confirmation of all transfers of custodied securities
to or from the account of the insurer or HMO, and reports of custodied
securities sufficient to verify information reported in the insurer's or HMO's
annual statement filed with the Texas Department of Insurance and supporting
schedules and information required in any audit of the insurer's or HMO's
financial statements whether the custodied securities are held by the custodian
or by a subcustodian.
(8) The
insurer, HMO or its designee shall be entitled to examine all records
maintained by the custodian or subcustodian relating to the insurer's or HMO's
custodied securities during the course of the custodian's regular business
hours. This paragraph does not apply to a clearing corporation or the Federal
Reserve Book Entry System.
(9) Upon
request of the insurer or HMO, the custodian shall be required to send to the
insurer or HMO all reports it receives from a clearing corporation or the
Federal Reserve book-entry system on their respective systems of internal
accounting control, and all reports prepared on the custodian's and
subcustodian's systems of internal accounting control of custodied
securities.
(10) The custodian
shall not use any of the insurer's or HMO's custodied securities for the
custodian's benefit and none of the insurer's or HMO's custodied securities
shall be loaned, pledged, or hypothecated by the custodian or subcustodian
without a written contract executed by the insurer or HMO separate and apart
from the custodial agreement.
(11)
The custodian is authorized and instructed by the insurer or HMO to honor any
requests made by the Texas Department of Insurance for information concerning
the insurer's or HMO's custodied securities. The department, from time to time,
may request, and the custodian shall furnish, a detailed listing of the
insurer's or HMO's custodied securities (whether in the possession of the
custodian or with a subcustodian). The custodian's response to such requests
shall be made directly to the department and shall encompass all of the
insurer's or HMO's custodied securities (whether in the possession of the
custodian or with a subcustodian).
(12) The custodian and subcustodian shall
maintain the usual and customary insurance coverage for custodial banking risks
at levels considered reasonable and customary for the custodian banking
industry covering the custodian's duties and activities as custodian for the
insurer's or HMO's assets and shall describe the nature and extent of such
insurance protection. Any change in such insurance protection during the term
of the custodial agreement shall be promptly disclosed to the insurer or
HMO.
(e) Effective Date.
All insurers and HMOs subject to this section shall comply with subsection (d)
of this section no later than 90 days after the effective date of this
section.